For more than 40 years, California has led the nation in environmental regulation, from passing the toughest coastal protection laws to America's first rules banning leaded gasoline.

Now, this week -- after Hurricane Sandy pushed the issue of climate change back into the national spotlight -- California will become the first state to begin requiring a broad range of businesses to reduce their greenhouse gas pollution.

At 10 a.m. Wednesday, the California Air Resources Board is scheduled to hold its first auction to sell pollution allowances under the state's landmark cap-and-trade law.

The idea is simple: The state sets an overall "cap" for California's greenhouse gas emissions, and companies must buy or sell credits to account for how much they pollute. Those that pollute more must clean up or pay more.

"For the first time, business will begin to understand what it means to put a price on carbon," said Stanley Young, a spokesman for the California Air Resources Board. "The program rewards efficiency. It will help move California away from its dependence on fossil fuels and toward a clean-energy economy."

The event comes six years after former Gov. Arnold Schwarzenegger signed AB32, the law that required California to lower its greenhouse gas emissions by 2020 to 1990 levels -- the equivalent of a 17 percent reduction.

"It's the largest carbon market in the United States, and the second largest in the world, behind the European Union," Young said.

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Environmentalists are hailing the auction as the moment America finally got serious about addressing global warming. The country's most populous state has locked down binding regulations and financial incentives to pressure industry to use less coal, oil, natural gas and other fossil fuels that the overwhelming majority of the world's climate scientists say are already warming the earth and disrupting weather patterns.

"People from around the country are watching it closely," said Alex Jackson, an attorney with the Natural Resources Defense Council, an environmental group in San Francisco.

"The stakes are high. Climate progress in the U.S. has languished at times, and California has an opportunity to develop a model, show that it works and encourage others to take note."

Some business groups, however, particularly those representing oil companies, power plants and large factories that burn vast amounts of fossil fuels, call the process a hidden tax that will result in higher utility bills and gasoline prices.

"It's going to really hurt consumers. It is going to hurt small business," said Dorothy Rothrock, vice president of the California Manufacturers and Technology Association, in Sacramento. "These costs are going to be passed down. Energy is what makes the economy run. And we are increasing energy costs."

The air board estimates the regulation will add 10 cents per gallon to the price of gas for every $10 per ton that industry pays for allowances. On Friday, the futures market pegged the price at $12 a ton, which could result in a 12-cent per gallon increase

The association has asked Gov. Jerry Brown to delay the auction, but his office has declined. There are rumors the association or other business groups may file a last-minute lawsuit, seeking to stop the auction.

If it goes forward, as many expect, there will be no auction house, no auctioneer barking out rapid-fire prices, no room full of buyers raising paddles. Instead, the event will be a 21st century auction: Hundreds of people will sit at computers around the United States, placing bids in secret, electronically, in a secure online market.

AB32, Schwarzenegger's main legislative legacy, included a broad range of programs to reduce greenhouse emissions in California. To meet its targets, it relies, for example, on California's law requiring that 33 percent of electricity come from solar, wind and other renewable sources by 2020. It also relies on another law that requires new cars sold in California by 2016 to reduce greenhouse emissions by 30 percent.

But the cap-and-trade rules on industry have been the most contentious.

Under the program, any business that emits more than 25,000 metric tons of carbon dioxide or other greenhouse gases is affected. It covers 360 businesses, representing 600 facilities. Oil refineries, power plants, cement companies, large food processors and major factories are affected. After 2015, the law also will include transportation fuels, meaning that oil refineries will need permits to account for the emissions from all the vehicles in the state.

Under the law, companies must have one permit, or allowance, for each metric ton of greenhouse gases they emit. Initially, the state provides 90 percent of the permits free, and over time reduces that. To comply with the law, a company has three choices. It can reduce its pollution by installing more efficient equipment. Or it can purchase allowances for the other 10 percent of emissions at one of four auctions the state will hold every year. Or it can buy allowances from other companies, which gives each company an incentive to reduce pollution by a large amount so it can sell its excess allowances.

Money from the state auctions, which is expected to total more than $1 billion a year, must fund climate-related programs, such as making public buildings more energy efficient, providing rebates for efficient appliances or vehicles, or funding public transit projects such as high-speed rail.

The pollution market was originally a Republican idea, put in place by President George H.W. Bush in 1990 to reduce sulfur dioxide pollution that causes acid rain. Since then, sulfur dioxide emissions have fallen 65 percent from industry.

Under California's system, each company needs to have its greenhouse gas allowances in place starting in November 2014, so not every company is expected to participate in the first auction on Wednesday.

The public's attitudes on global warming are changing, with 68 percent of Americans in a Rasmussen poll last week saying global warming is a serious problem, up from 46 percent in 2009.

After record-breaking drought in the Midwest and forest fires in the West last year, Hurricane Sandy devastated the East Coast late last month. Scientists say that while the hurricane was not caused by warming, warmer ocean temperatures -- 5 degrees Fahrenheit in the Atlantic Ocean warmer than the 30-year average -- made the hurricane stronger. And the ocean has risen 8 inches in the past 100 years, which made flooding worse during storm surges.

Although Congress has refused to pass mandatory climate-change laws, President Barack Obama put in place several policies to address global warming, including doubling the national gas-mileage standards to 54 mpg by 2025 and requiring the EPA to draw up greenhouse gas limits on power plants by next year. Now, the federal government will be watching California to see if it can learn from the experiment.

"Wednesday is important," Jackson said. "It is the moment when something that has been gathering momentum since 2006 takes flight."

HOW CAp-AND-TRADE Will WORK
Tallying pollutants: A large factory or oil refinery emits 1 million tons of greenhouse gases a year. At the start of the program, the company would only be responsible for 10 percent of those emissions, or 100,000 tons, and more in future years.
Totaling the costs: If the company purchased pollution "allowances" for the 100,000 tons, at $12 a ton, that would cost $1.2 million.
Where the money goes: To a state fund that would pay for climate-related programs, such as making public buildings more energy efficient, providing rebates for efficient appliances or vehicles, or funding public transit, including high-speed rail.